Ukraine’s Own Goal

Why, two decades after communism ended and Ukraine gained its independence, does the country remain mired in economic torpor and an authoritarian politics that has aroused such ire in Europe? When a country like Ukraine develops slowly and remains poor, it is not because of natural disaster or resource constraints. Bad policies pursued by bad governments are to blame.

Contrary to what many Western economists think, the worst economic breakdowns are not the result of free markets gone haywire, but of excessive concentration of political power. To insure against the worst human and economic catastrophes, limits to political power must be introduced and a system of checks and balances maintained.

Witness the divergence in long-run economic growth between the Euro 2012 co-hosts. Poland’s GDP has almost doubled over the last 20 years, while Ukraine is still barely maintaining the output level recorded during the last year of socialism. Generally speaking, Central and Eastern European countries have performed better economically than the ex-Soviet countries (with the exception of the Baltic states).

Economic growth is a matter not just of quality of life, but of quantity as well. Child mortality rates have declined in all Central European countries over the past 20 years, especially in Poland, where the rate fell from 17 per 10,000 live births to seven. In the Czech Republic and Slovenia, life expectancy has increased from 71 to 77, similar to other Central European countries.

In Ukraine, by contrast, under-five child mortality rates have fallen only slightly, from 25 per 10,000 live births to 24, while life expectancy has declined from 70 years to 68. The same stagnation applies to Russia.

The post-communist record shows that the countries that reformed most successfully are also the most democratic – indeed, as democratic as any in the West. The worst economic outcomes in the region are found in countries that have diverged from democracy.

Democracy is not a panacea, but non-democratic regimes usually pursue worse economic polices than democratic governments do. The former engage in predatory and unpredictable regulation, which produces a bad business environment.

Another danger is heavy taxation. Official taxes are high when spending is high. When spending is high, it is usually social spending that is badly targeted, which means that only a small share of poor people really benefit. Moreover, corruption payments should be added to official taxation. It may turn out that most businesses are hit by heavy taxation of both varieties – so heavy that the economy cannot grow, as appears to be the case in Ukraine.

Furthermore, uneven protection of property rights – crony capitalism – means that a small number of businessmen are politically favored. They may pay lower taxes, or their competitors may be subject to raids by the authorities. Because the state uses its apparatus to deter competition – both informally, through arbitrary enforcement of property rights, and formally, through trade restrictions – crony capitalism is not only unjust, but also inefficient. Individual businessmen may succeed, but the economy will not. Without competition, capitalism works only a little better than socialism did.

A key ingredient of Poland’s success in the last 20 years was a clear separation, from the very beginning of the post-communist transition, between politics and business. There were uniform rules and equal protection for everyone. Poland introduced massive competition by dismantling monopolies and opening its economy to the world.

Moreover, Poland avoided extreme booms and the deep recessions that follow. Most booms are produced by bad monetary and fiscal policies. This is true of the recent boom-bust sequence in Spain, Ireland, the United States, the United Kingdom, Bulgaria, and the Baltics, among others. In Ukraine, too, a huge boom in 2004-2007 was followed by a contraction amounting to almost 15% GDP in 2009 – a direct result of domestic policies.

Ukraine’s record over the past 20 years demonstrates that it is not enough to abolish socialism. The real challenge is to build free-market, rule-based capitalism. And, to do that, an energetic civil society must demand an end to crony capitalism. Ukraine’s citizens can become more like their Central European neighbors, or they can allow the economy’s many distortions from past bad policies to persist, in which case they will fall further behind.

Leszek Balcerowicz, a former deputy prime minister and finance minister of Poland and a former president of the National Bank of Poland, is currently Professor of Economics at the Warsaw School of Economics.

Copyright: Project Syndicate, 2012.
www.project-syndicate.org